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Retirement goals look different for everybody. You might want to enjoy time with grandkids, travel, work in the garden or watch TV all night without worrying about how late it is. Yet common retirement advice given is generic and doesn’t help with people reaching their individual goals.
In this post, I am going to discuss common mistakes to avoid when planning for your retirement – mistakes that most don’t know they’re making! We all have different circumstances, goals and expectations and most advice on retirement follows a cookie-cutter approach. Banks and advisors give out advice that try to fit every circumstance and every expectation, but this is problematic. This is how bad advice is spread and more people keep making these mistakes when planning their retirement.
A common strategy is to put all that you have into a savings account, because no matter how the world fluctuates, you are guaranteed a 100% return with no risk at all. This strategy was great 30 years ago when term deposits had 15% interest rate per year, but simply does not work in 2021. Back then, if you saved $10,000, you would get 15% so after 5 years of saving, it would have grown to $20,113.57, essentially doubling what you put in. Today, Canadian banks are offering 1% so saving $10,000 for 5 years would earn you $510 additional dollars. It is a guaranteed return yet also a loss due to fees and inflation.
Meanwhile, if you are putting money into a savings account, banks will take your deposit and lend to others with a 3-6% interest rate or invest into the market which is an obvious reason for banks to promote you putting your hard earned dollars into a savings account. They are making money off of your savings. Yet, even if you have a big savings account, no one ever teaches you how to take that money out, how to turn it into an income or how to use it. They expect you to just know what to do.
While I’m not saying you shouldn’t have a savings account altogether, but rather before you blindly follow this advice from the bank, get clear on your goals. Visualize your retirement and what you want to do and knowing this will help you determine the best strategy going forward.
Putting too much money into your RRSP could lead to you potentially earning less government benefits. For example, you make $60,000 each year with rental income, pension, CPP and OAS, and you have an RRSP worth $500,000. This is very achievable after building it for 40 years. However, at age 71, by law you are to convert your RRSP into a RRIF, Registered Retirement Income Fund, which by-law forces you to take out at least 5% adding another $25,000 to your existing income. This results in you paying more tax, but also your OAS payment is reduced due to income clawback. Even though the income is from your own savings, a higher retirement income will lead to the government reducing benefits.
According to a study, for some government benefits such as OAS, the significance of the benefit payout amount vs the actual buying power is gradually losing almost 50% over the next half-century. You might not be aware of it, but it is happening which is why you should not rely too much on the government when planning your retirement as it could cost you your desired lifestyle. There are other strategies to try to maximize your benefits including offsetting your active income with tax deductions, transferring your taxable income into tax-free income or having a plan for a better RRSP exit strategy.
We are all different so the key here is to find something that makes you less dependent on the government.
We live in a fast-paced world and things do change, just think about the past year. Saving tactics that worked years ago are now obsolete, and it’s likely these tactics mentioned in this post won’t work in 10 years.
The way to combat this is to stay informed, such as subscribing to my YouTube channel where I teach Canadians how to build their wealth.
While tactics change, there are core saving strategies that will always stay the same and these are the ones to keep in mind:
Following these four principles will keep your retirement safe and secure, even if things change.
The reason so many are making these three mistakes is because of a lack of education and keeping up with updated information. Changing your actions today could help you better save for your retirement. If you want a complimentary consultation to plan your retirement, please contact me and I’d be happy to make my recommendations. Everyone has a different situation and I want to hear your story and learn about what you want for your future. Or, if you would like to learn more about building your wealth in Canada, subscribe to my YouTube channel where I cover topics on retirement, wealth and insurance to help Canadians make better financial choices.